When Nintendo announced last week that it would soon start offering the majority of its retail 3DS and Wii U games as digital downloads, it represented a major change in policy for the company. But buried in the announcement was what could possibly be an even more significant change in Nintendo's relationship with brick and mortar retailers.

For the past few years, Sony and Microsoft have both let game retailers share in a slice of the downloadable marketplace by selling codes for downloadable games and add-on content directly at the register. The retailer acts like a physical Xbox Live Marketplace or PlayStation Store here, sending the purchase request directly to the platform holder's servers and printing out a download code. In exchange, the retailer pockets a commission of 15 to 20 percent of the sale price, which is set by Sony or Microsoft as identical to the price offered on their online stores.

The relationship Nintendo is envisioning for retailers selling its downloadable games is more akin to the standard wholesale model currently used for physical games. Under Nintendo's plan, retailers would buy download codes directly from the publisher at a lower wholesale price, then resell them to consumers at whatever price the retailer thinks will bring in the most profit.

At first glance, this would seem to suggest that retailers could quickly mark down underperforming downloadable games, just as they do currently for physical games. But without the incentive to clear out floor space for new products, it doesn't make much sense for a retailer to offer a downloadable game at below Nintendo's wholesale cost. Then again, it doesn't make much sense for retailers to sell downloads much above the wholesale cost either, given the lack of significant distribution costs and the price pressure of competition from other retailers.

Nintendo doesn't see things shaking out that way. "There are several types of retailers," Nintendo President Satoru Iwata said in a recent investor Q&A. "A retailer that offers products at comparatively high prices but provides good services and is in a convenient location, or a retailer that only focuses on offering products at lower prices than others do. I expect to see sound competition among retailers that take advantage of their strengths as they have done so far."

In that same Q&A, Iwata was reluctant to discuss how its wholesale prices would differ between downloadable and physical versions of the same game. He did suggest that retailers should expect much smaller margins from selling the downloadable versions. "If the retailers can sell our software without having to shoulder the inventory risks, it is natural in fair business transactions that there will be changes in their margins, for which the inventory risks are taken into consideration," he said.

And Nintendo doesn't seem to think the reduced distribution costs for downloadable games should translate to lower prices for consumers, either. In fact, Iwata said the suggested retail price for downloadable and physical versions of the same game "will be the same in principle, so that consumers can make the choice." This is a marked difference from Microsoft and Sony, which often (though not always) sell downloadable versions of games at prices lower than their physical counterparts.

Iwata justified the suggested pricing parity by arguing that the value of the game is in the software itself, and that the distribution format for that software shouldn't have any impact on a game's value to the consumer. In fact, Iwata argues, some consumers may actually find more value in a version of a game that is permanently stored on the system, without the need to carry around a disc or game card (never mind that these games are tied to the system they're first downloaded to, and can't be resold like physical games).

Given the business realities of the downloadable game market, it might seem a bit odd that Nintendo wants to bring brick-and-mortar retailers into the loop in a meaningful way at all. After all, if Nintendo wanted to, it could cut out the middleman and offer downloadable games directly to consumers at wholesale prices, reaping the revenue much more simply and directly.

But Iwata says brick-and-mortar retailers serve an important marketing purpose, even for games that are purely downloadable. "We recognize that one of the biggest hurdles for the expansion of our digital business is the limited methods to expose digitally downloadable products to potential consumers," Iwata said. "If only the consumers who proactively visit the Nintendo eShop are aware of the digital download software that we deploy, there is no chance that our digital business can drastically expand."

In other words, Nintendo is reluctant to give up entirely on the old ways of doing business, even as it takes its largest step yet into new forms of game distribution. This odd wholesale-meets-retail-downloads business plan reflects that same reluctance, and shows a company that seems unable to face the inevitable rise of fully digital game distribution.

"Iwata justified the suggested pricing parity by arguing that the value of the game is in the software itself, and that the distribution format for that software shouldn't have any impact on a game's value to the consumer."

Its an interesting stance to take - its the actual experience you are buying, not just the disc/download. Makes selling eBooks at the same price as hardbacks of the same title justifiable. Bugger...

If I'm downloading a piece of content from the manufacturer, what possible value does a retailer have to add? They already don't take returns, there's no trade-in for digital games, I don't have to visit the store, and the concept of limited preorders becomes artificial.

The value to the manufacturer is pretty obvious: they can continue to sell a known quantity of units to the retailer at a known price, thus perfectly forecasting their dollar yield from a game. The retailer then continues to be a middle-man.

From a consumer's perspective, though, I feel like I need a retailer middle-man about as much as I need an asshole on my elbow.

"Iwata justified the suggested pricing parity by arguing that the value of the game is in the software itself, and that the distribution format for that software shouldn't have any impact on a game's value to the consumer."

Its an interesting stance to take - its the actual experience you are buying, not just the disc/download. Makes selling eBooks at the same price as hardbacks of the same title justifiable. Bugger...

Didn't Nintendo try something this like 30 years ago with the Famicom Disk System, where you could take a blank disk to a kiosk at a retailer and load it up with games. Also, didn't the disk system result in massive piracy that sank the platform?

I go out of my house. In my car. Drive to town centre. Park it. Possibly paying parking fees.Go to store. Get download code. Go back to car.Drive home. Go in house. Enter download code and wait for game to download.

That really doesn't make any sense. The game could have halfway downloaded by the time I have been to the store and back. I've not used any petrol. I've not wasted any time.

What, is my motivation to do this? What, exactly is in this for me?

Actually, I would probably do this, if the local game shop was locally owned by a nice couple of people.But the national chains wiped them out years ago.

I go out of my house. In my car. Drive to town centre. Park it. Possibly paying parking fees.Go to store. Get download code. Go back to car.Drive home. Go in house. Enter download code and wait for game to download.

That really doesn't make any sense.

You forgot: AND pay just as much as if you'd picked up a physical disc / cart that works right away without waiting for the download.

I can only see this scheme as utterly and pointlessly retarded and doomed to failure. Steam already got it right, you cut out as much of the middle man as possible. The publisher gets to decide the price directly and the only cut that is given out is the (hosting cost + hosting profit margin).

With Nintendo's scheme there's another middleman, sales like the Steam sales are impossible, there's potential inventory problems and management to deal with, there's another party to give a cut to, there's... there's just. It's retarded! Nintendo doesn't get as much money, the developer/publisher doesn't get as much money, there's no advantage!

As Zoidberg would say "Your business model is bad, and you should feel bad!"

I go out of my house. In my car. Drive to town centre. Park it. Possibly paying parking fees.Go to store. Get download code. Go back to car.Drive home. Go in house. Enter download code and wait for game to download.

That really doesn't make any sense.

You forgot: AND pay just as much as if you'd picked up a physical disc / cart that works right away without waiting for the download.

True. I may as well order the disc online or buy the disc. At least I can resell it, lend to friend.

I think this is Nintendo's way of getting on the good side of retailers. This way places like Best Buy or Toys R Us can have Madden '13 for $9.99 as a Black Friday loss leader, for example. Most of us may think of brick and mortar as dinosaurs, but for Nintendo's target market, they are still a great deal.

Nintendo is going after families with this. Same as they did with the Wii. They are counting on parents still shopping for video games in stores for their kids, having an actual physical store allows the sales clerk to "help" them choose a game. I can see the rationale for this. People on here for forget that most people don't spend their day looking at video game reviews or look for the latest news about videogames. Nintendo should also open up their own online digital platform, but why not let gamestop make a few sales for them? This is especially true if they are the only company doing this. Wait and see how much gamestop starts pushing nintendo's new systems and games.

I see absolutely zero benefit to the consumer by making downloadable titles available at retailers, unless one doesn't have internet at home. Even then, free internet is available all over the place (eg Starbucks)

I go out of my house. In my car. Drive to town centre. Park it. Possibly paying parking fees.Go to store. Get download code. Go back to car.Drive home. Go in house. Enter download code and wait for game to download.

That really doesn't make any sense. The game could have halfway downloaded by the time I have been to the store and back. I've not used any petrol. I've not wasted any time.

What, is my motivation to do this? What, exactly is in this for me?

Actually, I would probably do this, if the local game shop was locally owned by a nice couple of people.But the national chains wiped them out years ago.

There really is nothing in this for me.

Sales. On Sony and Microsoft's platforms you have to wait for them to have one of there rare sales. GameStop/ Wal-mart could mark down any game at any time, which could make it worth your while to drive there. This is also keeps GameStop and other retailers happier and more in the picture.

They could also be VC impulse buys, why not add Super Mario Bros to your purchase of Madden 15 for just $5? Saves you the hassle of having to buy points in some stupid block amount or using your credit card.

If it's done right it could make the browsing experiance better. I generally find online stores a bitch to browse through if you aren't looking for something specific.

EDIT: Retailers being happy is important as that's what keeps them stocking your hardware. Remember how few retailers wanted to stock the digital only PSP Go?

I say: Cut the middle-man. Give us fair prices for the digital download. Or, at least allow us a "friend code" so that we could share the game with our friends (With expiration dates if you will... that way it's like they've returned the game back to us/a.k.a., they don't own it.... unless you would have another code to resell the game at a fair price... paying perhaps a fraction to the developer/publisher/whomever!). This is all possible. Make it happen. Otherwise, I don't see the point of wasting my time (As mentioned above) by driving to a store so that I could get a darnnation code!!!!!!!!!!!!!!!

As EVOO pointed out, this is a way to keep retailers in the look. What incentive do retailers have for selling hardware if they're not also getting a piece of the software? Sony and Microsoft have slowly been edging out retailers, and increasing direct download sales means that retailers may be inclined to reduce their shelf inventory and downgrade shelf placement. Nintendo, by getting cozier with the retailers, ensures that their products will have premium shelf and display space. This will mean, as bigdrew172 pointed out, that casual shoppers and holiday shoppers who continue to frequent brick and mortar stores will have ample selection and ample opportunities for impulse and gift purchases.

This also doesn't rule out internet sales. If this is based off download codes, it means retailers like Amazon can still sell at a significant discount and those who want can still do all their shopping on-line.

It is indeed an odd model, but I don't necessarily think it is a bad one, or, as Kyle Orland suggested, an issue of reluctance to change. Though conservative it may appear at face value, I think it is actually riskier than what MS and Sony are doing in some ways. If they fail, they'll fail catering to companies who used to be referred to a partners in the business, and if they succeed, it will be seen as a stroke of genius.

I go out of my house. In my car. Drive to town centre. Park it. Possibly paying parking fees.Go to store. Get download code. Go back to car.Drive home. Go in house. Enter download code and wait for game to download.

That really doesn't make any sense. The game could have halfway downloaded by the time I have been to the store and back. I've not used any petrol. I've not wasted any time.

What, is my motivation to do this? What, exactly is in this for me?

Actually, I would probably do this, if the local game shop was locally owned by a nice couple of people.But the national chains wiped them out years ago.

There really is nothing in this for me.

It makes sense that there is nothing in it for you, but there is a lot in it for children and other less connected console owners. The market for games among people that don't use the online stores (and potentially aren't even aware that they exist) is much larger than the market of those who know about/use online stores, at least for now.

Over the past year physical media has been trending slightly upward in some areas (or depending on product and format, at least not freefalling at previous rates). Physical media will always have a place in the market, and probably a slight premium, because it affords the owner more rights, specifically the right to resell the product.

I have tons of games from 15-20 years ago that I still occasionally play whose manufacturer or even system is gone completely now. If I had purchased digitally, I'd have lost them forever. Hell some NES games are worth thousands now. My parents have records from the 50's from record labels I've never even heard of, and in some cases these LPs are worth money. Who knows if Nintendo, Apple, and friends will be around in 50 years time?

I get it, it basically boils down to just marketing. I see no logic whereby it's actually in the consumers financial interests to partake in this (especially if there's not much price difference). But this way (for marketing) - the retailers can say - ooh look! We've joined the 21st century! Then there's the goodwill Nintendo will have with the retailers (i.e. they've opted to go that route to shore up their declining sales rather than a steam-like model).

There's arguments either way, but time will tell whether this approach will bring Nintendo back to the black.

I go out of my house. In my car. Drive to town centre. Park it. Possibly paying parking fees.Go to store. Get download code. Go back to car.Drive home. Go in house. Enter download code and wait for game to download.

That really doesn't make any sense. The game could have halfway downloaded by the time I have been to the store and back. I've not used any petrol. I've not wasted any time.

What, is my motivation to do this? What, exactly is in this for me?

Actually, I would probably do this, if the local game shop was locally owned by a nice couple of people.But the national chains wiped them out years ago.

There really is nothing in this for me.

Yeesh what's up with the hate? It's not like the eShop won't exist and you can't access it from the comfort of your home console's online store. They're not forcing you to go to a retailer, it's just another option.

This is just an additional way for games to get visible marketing in shops, keeps the retailers happy.

"There are several types of retailers," Nintendo President Satoru Iwata said in a recent investor Q&A. "A retailer that offers products at comparatively high prices but provides good services and is in a convenient location, or a retailer that only focuses on offering products at lower prices than others do. I expect to see sound competition among retailers that take advantage of their strengths as they have done so far."

Convenient location? You mean, like wherever the f-ck I am at any given moment with wireless connectivity? Is this guy serious? I can go on my phone and buy a game right now. Done. Playing it already. Or if it's Steam, it'll be ready to download as soon as I get home or off the can, whatever.

Does Nintendo headquarters lack windows and an internet connection? Does their executive had any idea what the competition is? They can shuffle and retool the barriers all they want, but until they tear those barriers down, they'll keep bleeding sales to the competition.

I'm in sales. My daily motto is "make it as easy to buy from me as possible". That's it. Do whatever it takes to make it easier to buy from me than my competitor. Nintendo has no clue how to do that.

I'm not. Not as long as PS Vita memory cards cost what they do, and downloadable games cost the same as boxed games. Further boxed games can be resold.

If they're also selling physical media you have a point. However, that's also another issue with this model. Apple is killing them because the prices on most games are so low people don't even think twice. I realize that it costs more to make a longer quality title but there I no reason they couldn't price games around $15, make quality lengthy games and still make a ton. Win, win. Of course, Nintendo would have to be willing to either not have their product on the store shelves or not have prominent placement. Being conservative they're too cautious to take the risk.

Sales. On Sony and Microsoft's platforms you have to wait for them to have one of there rare sales. GameStop/ Wal-mart could mark down any game at any time, which could make it worth your while to drive there. This is also keeps GameStop and other retailers happier and more in the picture.

This. A lot of places do launch sales on bigger games too, and this setup lets retailers do that with digital codes rather than being stuck with whatever price Nintendo sets.

QuarterSwede wrote:

I wouldn't have nearly as many issues with this plan if Nintendo would /also/ sell directly to consumers ala Apple/Microsoft/Google's model. I'm done buying physical mobile games. Seriously.

They're doing that too. The retail path mentioned here is just another way to buy them digitally.

Yeesh what's up with the hate? It's not like the eShop won't exist and you can't access it from the comfort of your home console's online store. They're not forcing you to go to a retailer, it's just another option.

Because it means if Nintendo runs their own download store, they'll be obligated not to discount their own titles to avoid undercutting retailers. The prospect of Steam type sales from Nintendo was not great to begin with, and this pretty much drives a nail in its coffin. It means anybody who is interested in Wii U games is going to be propping up dying retailers that still don't realize that they're rapidly becoming obsolete with the new digital distribution systems.

On the one hand, this is pretty archaic. If you can download a game, why go out to purchase the code and then enter it to download it.

On the other hand, I do miss music stores, arcades and video rental places. Soon, I'll miss book / comic book stores. It's kind of sad to see the end of real 'facetime' social interaction that can be had in a retail environment that fosters interaction amongst staff and between patrons.

I, like most, love the convenience and cost-savings of amazon. But do we really save more money or just end up buying more stuff (and equally as broke)? Does it save us a trip to the store or does it simply turn us into 24-hour consumers? And is giving some money to middlemen (many of whom are independent small businesses) really worse than giving it all directly to massive corporations so they can improve their bottom-line?

I'd prefer to give some of the share to the former - more jobs, more competition, less power in the hands of those in control of the content. I have little faith this will work on a large-scale, but Nintendo does make odd choices (that occasionally work out).

If I'm downloading a piece of content from the manufacturer, what possible value does a retailer have to add?

Easy. You already see retailer-exclusive content in games. The retailer can add that same "value" to their version of the downloadable copy of that game. With the entire game being downloadable, they could even have tiered levels of exclusive content. They could offer retailer-specific DLC. This would be much easier with digital delivery than having to press different versions of the game into CDs.

I go out of my house. In my car. Drive to town centre. Park it. Possibly paying parking fees.Go to store. Get download code. Go back to car.Drive home. Go in house. Enter download code and wait for game to download.

That really doesn't make any sense.

Huh? Brick and mortar stores already let you order physical copies online. What's stopping them from simply showing you the download code on that same website when you pay for the digital version of a game?

Quote:

Iwata justified the suggested pricing parity by arguing that the value of the game is in the software itself, and that the distribution format for that software shouldn't have any impact on a game's value to the consumer.

A terrible argument, because with a CD, the consumer isn't just buying a game, but also the legally enshrined right to sell it on. Bar a court case that confirms that resale rights also extend to digital games (as they should), digital purchases of a game do not confer that same re-sale right.

It means anybody who is interested in Wii U games is going to be propping up dying retailers that still don't realize that they're rapidly becoming obsolete with the new digital distribution systems.

Erm ok, that doesn't really make sense to me. I am interested in Wii U games, and I will buy & download them via the eShop, how exactly am I propping up dying retailers?

Sure if i happen to be walking through a shopping centre, see a good deal on a Wii U game from a store and get it there, I can see how I'd be helping the retailer. At the end of the day I get the game I wanted, and they're happy for the sale.

Video game retailers provide physical advertising space for games in places where people will see them while they are doing other things. Most online distribution channels have no such physical advertising. I can see why Nintendo is doing this, it'll be interesting to see how it pans out.

We should be able to buy physical copies of software, and get a free download code, it case it gets broken.

That would only happed if the game is tied to the system, as it has been mentioned that the next Xbox / Playstation may do. Otherwise, many people would buy the disc, download it and then re-sell /trade-in the disc.

Video game retailers provide physical advertising space for games in places where people will see them while they are doing other things. Most online distribution channels have no such physical advertising. I can see why Nintendo is doing this, it'll be interesting to see how it pans out.

"Iwata justified the suggested pricing parity by arguing that the value of the game is in the software itself, and that the distribution format for that software shouldn't have any impact on a game's value to the consumer. In fact, Iwata argues, some consumers may actually find more value in a version of a game that is permanently stored on the system, without the need to carry around a disc or game card (never mind that these games are tied to the system they're first downloaded to, and can't be resold like physical games)."

Wow Mr. Iwata you are delusional. I can sympathize you have to drink the Kool-Aid becuase you work there, but that doesn't mean you have to grab the punch bowl, stand on the table and gulp it down in one fell swoop, then throw up all over the place.

I should point out that Nintendo is a Japanese company. Their retail spaces work differently. These comments, and the Nintendo spokespeople who commented, are Japanese. Has Nintendo become a global entertainment company, sure it has but it still is one of the rare companies I feel, that even after almost 30 years has held onto their cultural roots.

I sort of agree with his comments, in many ways, the price of the game should be left up to the retailer.

Amazon would be able to sell a digital copy for a 20% over the physical copy, because you are an Amazon Prime subscriber if they wanted, and still a small profit. The retail shelf space in Japan is very costly, so the idea that a retailer can offer "codes" that a machine can print out ( self-service ), likely appeals to the retail customers Nintendo deals with in Japan.

It seems like the NIntendo Wii U will be interesting, if the big retailers, can take advantage of the ability to sell digital only copies of a game for less. If nothing else....It would seem somebody could make a KILLING doing exactly that, only buying the digital supply, and coming up with a unique ways to promote their business.

If I had 20-30k I might actually do exactly that. This is no different then what Steam does, by offering sales, minus the wholesale/producer pricing schema clearly.

It really depends what the wholesale price is on say 1,000 units, the margins I understand are very small on video games, Apple has proven you can make a decent profit out of only digital product via an web interface ( i.e. iTunes ).

* Yes I understand in the grand scheme of things Apple makes very little, but just think about it, a online retailer offering a digital product cheaper then anyone else. I mean a "new" player, say a Amazon, since they have no retail space. Walmart, Best Buy, and Gamestop would have to scrafice their in-store business ( which gets rid of their inpluse purchases ) or

I'm not sure why people are so bothered by this strategy. I guess most of the Ars Technica's posters will get their fix directly from the Nintendo eShop. However, as much as digital downloads are certainly the future of sales, most customers do acquire their games from retailers. By giving these retailers a piece of the cut and some control over the pricing structure, Nintendo is giving them an incentive to push their products over the competitors. As much as I can see, it sounds like a good strategy to me.

Kyle Orland / Kyle is the Senior Gaming Editor at Ars Technica, specializing in video game hardware and software. He has journalism and computer science degrees from University of Maryland. He is based in Pittsburgh, PA.